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Professor Kleinberger posts this document as the chair of the L3C Review Subcommittee of the Committee on Limited Liability Companies, Partnerships and Unincorporated Entities. The letter and attachment were principally drafted by that Subcommittee and sent to Minnesota Representative Steve Simon on April 19, 2012.


This document comprises a letter and attachment “submitted by the ABA Business Law Section on behalf of its Committee on Limited Liability Companies, Partnerships, and Unincorporated Entities and its Committee on Nonprofit Organizations … and states our views on … a bill ‘relating to limited liability companies [and] providing for the creation and operation of low-profit limited liability companies.’” The letter and attachment “have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and should not be construed as representing the policy of the ABA.”

Supported by detailed analysis of both tax and LLC law, the letter makes the following major points:

  • The L3C is no better than any other business form for receiving program related investments from private foundations. L3C legislation implies otherwise and we believe is therefore misleading.
  • Using a program related investment as part of the type of tranched financing promoted by L3C advocates portends serious risk of improper “private benefit” – i.e., using charitable assets to the benefit of private interests such as for-profit investors. “Private benefit” transactions are improper for a private foundation and imperil a foundation’s tax-exempt status. A private foundation cannot remain qualified as a tax-exempt charitable entity if the foundation has transgressed the private benefit doctrine.
  • In addition:
    • enacting L3C legislation inadvertently but dangerously signals that state law can streamline and simplify compliance with federal tax law requirements and that program related investments can be accomplished simply, quickly, and almost “off the rack;”
    • it is inappropriate and unnecessary to use state entity law to provide a new and potentially misleading “brand” to mark private business ventures as socially beneficial;
    • the L3C legislation contains a technical flaw that renders the legislation self-defeating in most instances; and
    • current LLC law already permits the type of ventures contemplated by the L3C legislation.